Risk Management in Commodity Markets: From Shipping to Agriculturals and Energy

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Managing Agricultural Price Risk in Developing Countries^*

Julie Dana and Christopher L. Gilbert

13.1 THE LIBERALIZATION CONTEXT

Agricultural commodity prices are volatile because short term production and consumption elasticities are low. Production responsiveness is low for annual crop commodities because planting decisions are made before prices for the new crop are known. These decisions depend on expected prices and not price realizations. Price outcomes are seldom so disastrous as to result in the harvest being abandoned. For tree crop commodities, production responsiveness is low because the stock of productive trees takes between two and five years to respond to price increases, because input application generally gives only a modest increase in yield and because prices are seldom so low as to make it worthwhile to cut down trees which still have a productive future. Short-term demand elasticities are low because the actual commodity price will seldom be a large component of the overall value of the final product (examples are cocoa in chocolate and coffee beans in soluble coffee powder – see Gilbert, 2007a) and because substitutability between different raw materials is seldom large. Elasticities may be higher for subsistence crops in poor economies where high prices may force families to try to get by on less.

Throughout the twentieth century, the variability of agricultural prices induced both developed and developing country governments to seek to prevent or offset ...